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CHAPTER 11 -- INVENTORY MANAGEMENT
Application 1: Finding the EOQ, Total Cost and TBO
Suppose that you are reviewing the inventory policies on an item stocked at a
hardware store. The current policy is to replenish inventory by ordering in lots of
360 units. Additional information is:
D = 60 units per week, or 3120 units per year
S = $30 per order
H = 25% of selling price, or $20 per unit per year
a. What is the EOQ?
b. What is the total annual cost of the current policy ( Q = 360), and how does it
compare with
the cost with using the EOQ?
Current policy EOQ policy
Q = 360 units Q =
C = (________)(_____) + (_______)(____) C = (________)(_____) + (_______)(_____)
C = ________ + ________ C = ________ + ________
C = $ _______ 3860 C = $ _______ 1935
c. What is the time between orders (TBO) for the current policy and the EOQ
policy, expressed
in weeks?
TBO 360 = 360 units/order / 60 wks/order = 6 weeks
TBO
EOQ
= 97 units/order / 60 wks/order = 1.6 weeks
Application 2: EPQ
A domestic automobile manufacturer schedules 12 two-person teams to assemble
4.6 liter DOHC V-8 engines per work day. Each team can assemble 5 engines per
day. The automobile final assembly line creates an annual demand for the DOHC
engine at 10,080 units per year. The engine and automobile assembly plants
operate 6 days per week, 48 weeks per year. The engine assembly line also
produces SOHC V-8 engines. The cost to switch the production line from one
type of engine to the other is $100,000. It costs $2000 to store one DOHC V-
for one year.
a. What is the economic lot size?
1555 engines
b. How long is the production run?
25.9 days
c. What is the average quantity in inventory?
324 engines
d. What are the total annual costs?
Application 4 : Selecting the Safety Stock and R
Suppose instead that the demand during lead time is normally distributed with an
average of 85 and L
a. Find the safety stock, and reorder point R , for a 95 percent cycle-service
level.
Safety stock = z L = ______ (______) = ______ , or ______ units
R = Average demand during lead time + Safety stock
R = _______ + _______ = _______ units
b. Find the safety stock, and reorder point R , for a 85 percent cycle-service level.
Safety stock = z L = ______ (______) = ______ , or ______ units
R = Average demand during lead time + Safety stock
R = _______ + _______ = _______ units
a. 1.65 * 40 = 66 units; 85 + 66 = 151 units
b. 1.04 * 40 = 42 units; 85 + 42 = 127 units
Application 5: Inventory Models:
The Discount Appliance Store is trying to apply inventory management models to
their business. One of the company’s items has the following characteristics:
Demand = 10 units/wk (assume 52 weeks per year)
Ordering and setup cost ( S ) = $45/order
Holding cost ( H ) = $12/unit/year
Lead time ( L ) = 3 weeks
Standard deviation in weekly demand = 8 units
Cycle-service level = 70%
a. What is the EOQ for this item?
b. D =
c. What is the desired safety stock?
L
= ______ (^) ____ = _____ units
Safety stock = z L
= (_______) = ______ units
c. What is the desired reorder point R?
R = Average demand during lead time + Safety stock
= ( ) + ___ = _____ units
a. approximately 63 units
b. D = 10 units/wk * 52 weeks/year = 520 units/year
c. 8 * sqrt(3) = 13.9 units; Z(0.70; Table B) = 0.525, so SS = 0.525 * 13.9 = 7.3 units
d. 10(3) + 7.3 = 38 units
